Gifts of Life Insurance

Transcription

1 Gifts of Life Insurance Effective Ways to Make Them If you have a desire to make a major contribution to support our good works, life insurance can be an excellent tool for helping you accomplish your philanthropic goals while achieving other important financial objectives. Indeed, life insurance can empower many individuals to make charitable gifts they never would have dreamed possible. Life insurance can be an excellent means of providing a major future benefit for an important charitable organization such as ours. It can provide satisfying tax and financial benefits. And it generally can be made at a relatively modest after-tax cost to the donor. In addition to an outright gift of an insurance policy, there is another important charitable use for life insurance. Oftentimes, an individual is strongly motivated to make a significant gift to charity, but is constrained from doing so by family considerations. The concern: If a lifetime gift is made, family members may be deprived of assets they will eventually need. Wealth replacement is a technique that has evolved to address this issue.

2 2 In this booklet we first discuss the ways you can use life insurance to make cost-efficient outright gifts to charity. Next, we explore the wealth replacement technique and show why it is becoming increasingly popular among donors who want to make a major impact with their giving. Low-Cost Major Gift Opportunities As noted, life insurance provides you with an excellent opportunity to make a major future gift to our institution at a modest after-tax cost to yourself. If it is a gift of an existing policy, there is no immediate out-of-pocket cost. Plus there are other tax benefits. By assigning to us complete and outright the ownership of your life insurance policy, you generally will get an income tax charitable deduction equal to the fair market value of the policy or its cost basis, whichever is less. Furthermore, you can arrange to deduct any future premiums that may be due on your policy as you pay. How an Outright Gift Works It s really quite simple to make a gift of life insurance. If you are the insured-policyowner you simply transfer physical possession of your policy to us and file an absolute assignment-ofownership form with your insurance company. Your company then will send an endorsement to us showing that we are the sole owner and beneficiary of the policy. Consider the situation of Bob, the owner of a $100,000 life insurance policy with a cash value of $12,000. He can assure that our institution will receive $100,000 at his death by assigning the policy to us and making annual gifts for the payment of future premiums. Bob can deduct $12,000 immediately for income tax purposes (or his cost basis in the policy if less than the cash value). He also can deduct later gifts he makes to us to help pay the premiums, and the proceeds from his policy will not be subject to the federal estate tax at his death. Other Effective Ways to Give There are other gift arrangements of life insurance you may also want to consider. You can simply name our institution as the beneficiary of a policy, although in this case you may not deduct the value of the policy you continue to own. Or, if you feel that a family member should have priority, you can name us as the contingent beneficiary. We will receive the proceeds only if your primary beneficiary is not living at the time of your death. You may also acquire a new policy and then transfer ownership of the policy to us. All the premiums you pay are tax-deductible charitable gifts. A very popular arrangement is to purchase a policy that will be paid-up in a few years. In many cases the after-tax cost of a generous future gift will be only a fraction of the benefit provided to our institution, without decreasing the estate you want to leave to other beneficiaries. You may want to consider the tax and financial rewards that can be gained by transferring a policy to a charitable remainder trust. The trust will pay an income to your beneficiary for life. At the death of the beneficiary, any remaining proceeds will pass to us.

3 3 This form of trust will produce immediate tax savings for you because the present value of our time-delayed interest will be immediately deductible as a charitable contribution. Furthermore, the policy proceeds will avoid probate, will not be reduced by estate administration expenses, and will be immediately available to begin paying an income to your spouse, child, or other named beneficiary. A Word of Caution In some situations, a charitable organization may not be considered to have an insurable interest in the insured. This means that the charity cannot apply for and be the original owner of a policy on the donor s life. Instead, the donor should apply for the policy and then transfer ownership to the charity. Check with your attorney about the law in your state. Replacing Assets Donated to Charity One deterrent for many individuals wanting to provide major financial support to our institution is fear of depriving their family of assets they may need someday. This presents a classic dilemma of competing family and philanthropic objectives. Fortunately, wealth replacement (also known as capital replacement ) is a technique that has evolved to help such individuals achieve both objectives. It can also provide significant income tax and estate tax savings. Wealth replacement involves the combined use of: a charitable remainder trust, a life insurance policy, and an irrevocable life insurance trust. Although it may sound complex, wealth replacement is a very effective way to achieve both family and philanthropic financial goals, while minimizing income and estate taxes, and in some cases capital gains taxes. Consider the following example which demonstrates the rewards and benefits of the wealth replacement technique. Case Study Mary, age 72, owns marketable securities worth $500,000. She purchased the securities many years ago for $100,000, and the holdings are producing income of around $12,500 each year (a 2.5 percent return). Mary has considered selling the securities and reinvesting the proceeds to obtain a higher income, but she is not happy about the capital gains tax that she would have to pay. Ultimately, Mary would like to split the property or the sale proceeds in her will among her three grandchildren. Furthermore, Mary is committed to making a significant gift to our institution, but not at the expense of her grandchildren. A Logical Solution. First, Mary transfers the securities to a charitable remainder unitrust that will pay her a 5 percent annual income (based on the value of the trust assets as revalued every year) for as long as she might live. Mary can deduct on her tax return the present value of the charity s remainder interest in the trust. She will also avoid the potential capital gains tax on the transfer to the trust. Second, Mary will use the tax savings from the charitable deduction and her income from the charitable remainder unitrust to acquire a $500,000 insurance policy on her life, naming her grandchildren as beneficiaries. The policy will be owned by an irrevocable life insurance trust. Mary will make annual gifts to this trust from a portion of the income she will receive from the charitable remainder unitrust. The trustee will use these annual gifts to make premium payments on the policy.

4 4 Finally, at Mary s death, the charitable remainder trust will be dissolved; our institution will receive the principal of the charitable remainder trust; Mary s grandchildren will receive the $500,000 insurance proceeds; and the irrevocable life insurance trust will either terminate or hold and invest the insurance proceeds for the benefit of the grandchildren. Consider These Benefits Mary fulfills her life-long desire to make a substantial gift to our institution. She maintains the size of the estate passing to her grandchildren. She avoids an immediate capital gains tax liability when transferring the appreciated securities to the charitable remainder unitrust. Mary takes an income tax charitable deduction in the year she transfers the securities to the charitable remainder unitrust. Neither the transferred securities nor the life insurance proceeds will be included in Mary s gross estate for federal estate tax purposes, saving her heirs thousands of dollars. Mary s grandchildren will receive the life insurance proceeds income tax-free. Essentially, Mary will be able to make two major gifts with the same asset one to her grandchildren and one to our institution! THE WEALTH REPLACEMENT ARRANGEMENT The donor transfers long-term appreciated property to a charitable remainder unitrust (CRUT) and receives a federal income tax deduction for the present value of the charity s remainder interest, subject to limitations. The CRUT pays the donor an income for life, or for a term of years not to exceed 20. The trustee of the CRUT can sell an asset without paying capital gains tax. The donor uses the income from the CRUT to make gifts to an irrevocable life insurance trust (ILIT). The trustee of the ILIT can use the gifts (after the beneficiary s right of withdrawal has expired) to help pay premiums for a life insurance policy on the donor s life owned by the ILIT. The initial face amount of the policy is often the fair market value of the property transferred to the trust. When the donor dies, the ILIT receives the policy death proceeds, and the charity receives the property in the CRUT. RESULT: Donor receives a current income tax charitable deduction and increased cash flow for life. Donor s heirs are made whole with life insurance that replaces the donated capital, and the donor makes a significant gift to charity. As you can see, the arrangement is not as complicated as it may have first appeared. You will, however, want to seek the advice of knowledgeable estate planning professionals. Many professionals today are well aware of this planning technique. They are in the best position to advise you of the appropriateness of this plan for your own situation. This diagram illustrates the steps involved in the wealth replacement arrangement. property donor charitable remainder trust charity income for life remainder at donor s death annual transfers insurance company pays death proceeds pays premiums irrevocable life insurance trust distributions donor s heirs

5 5 A Final Word We hope this booklet has helped you in exploring the many unique and rewarding charitable uses for life insurance. We will be pleased to help you plan a satisfying and taxrewarding gift of life insurance or to develop a plan for wealth replacement. If you or your financial advisors have questions about any of the suggestions made in this booklet, we can provide additional information. Please feel free to contact us at your convenience. GOL0108